Sydney tragedy overshadows bleak budget figures

On Monday at 12.30 the Treasurer was supposed to be releasing his statement on the Mid-Year Economic and Fiscal Outlook (MYEFO). In the end it was delayed by 90 minutes as the dreadful siege played out in Sydney.

The KPMG Sydney office, where I am based, went into lockdown along with many other nearby companies as the drama unfolded. Our thoughts are with those who have suffered in that tragedy.

It seems almost trite to talk about finance but there is no escaping that the figures finally released by the Treasury on Monday are bleak indeed. The $40.4bn deficit figure, which has naturally attracted most attention was at the high end of expectations, but even more extraordinary is the accumulated deterioration in the Budget position since the Pre-Election and Fiscal Outlook in August 2013.

We calculate the decline since then, taking in the Budget 2014 and the last two mid-year statements, to be $92.9bn, although there are some small policy changes within this figure that are not separately disclosed as policy items. This includes the paid parental leave. Be that as it may, this chastening figure must add impetus to the search for solutions both on the revenue and expenditure side of the equation.

I for one was grateful that, at least for time being, there was no sign of movement on a UK-style Diverted Profits Tax (DPT), or ‘Google Tax’, despite discussions between the two countries on this being suggested by the Treasurer. The UK measures seem extremely complex, and it is not at all clear who would be affected.

The DPT does not seem to fit comfortably with the OECD agenda – the whole point of which was for a multilateral approach to avoid countries taking unilateral action. So I would urge the government, despite the budget deficit imperative, to take great care before going down the UK route.

I was also glad that there was also no targeted measure in relation to Section 25-90 on offshore financing, as had been mooted. Such rules would be fraught with difficulty.

There was, however, a move to claw back revenue from companies capitalising and expensing in-house software. Depreciation will now extend over 5 years, rather than the current 4, which will raise $140m in 2016-17 and $280m in 2017-18.

This may have a significant and unwelcome impact on large institutions which may no longer be able to claim R&D for in-house software development, given that they exceed $20b turnover under the Government’s new threshold. We have concerns over this approach, which undermines R&D at a time when Australia needs a stronger focus on innovation.

But something clearly has to be done on revenue, and the government will shortly release its scoping paper, which will set out some boundaries for the tax White Paper process which will be launched in 2015. While some will be pessimistic as to the likelihood of success, given the increasingly polarised nature of our political system, the fact that business groups have had preliminary meetings with community groups such as ACOSS is surely an encouraging sign.

We must all hope the will is there to find another grand bargain on tax reform. The nation needs it.